Borders' Chapter 11: What Impact Will It Have On The Music Business?

The Borders Group's Chapter 11 filing shouldn't have too much of an impact on the music industry in general: Over the last two years the Ann Arbor-based merchant has made deep cuts in its music commitment. But it will have a big impact on labels that specialize in classical, jazz, folk, Americana and world music, and for big sellers that appeal to older consumers (such as Susan Boyle).

As part of its Chapter 11 filing, the 674-unit, Ann Arbor, Mich.-based chain has secured $505 million in DIP (debtor-in-possession) financing. Borders filed in U.S. Bankruptcy Court for the Southern District of New York, according to BurbageWeddell.com, a website by a law firm that specializes in representing creditors in Chapter 11 filings.

The site also lists Borders' 30 largest creditors, beginning with Penguin Putnam, which is owed $41 million. The first music vendor to appear on the list is Sony Music at no. 14, which is owed $4.3 million. It is followed by Universal Music Group at no. 17 ($3.75 million), WEA at no 18 ($3.4 million) and EMI Music at no. 26 ($1.7 million).

While the four majors combined are owed $13.15 million, things would have been worse if Borders had filed a few years back. The company, which only carries music in 500 of its stores, was once a significant force in music, but its SKU count has steadily declined as U.S. music sales dropped during the past decade. In 2000, when music sales was at its U.S. peak, the typical Borders store was carrying 50,000 titles, but that dropped to 29,000 by 2003, 14,000 in 2006, and 9,500 by 2009.

Since 2009, music has been reduced even further. At last report, only 15 stores carried a full music department of 9,500 titles, with hundreds of other stores carrying approximately 500 titles, and about 150 stores carrying around 25 music titles, according to sources and Borders' financial reports.

According to the company's financial statements, music sales in 2009 totaled $123.4 million, or 4.4% of the chain's $2.79 billion in sales that year. That's down from the $182.5 million music totaled in 2008 and $264.8 million that the category captured in 2007.

While Borders had been current in making payments through December, it became clear that the chain was going to miss its January payments, the biggest of the year, when extended data for inventory bought for Christmas comes due.

In mid-December, Borders tried to do an out-of-court debt restructuring, first floating the idea to the large vendors of swapping debt for equity; and when that fell through, then asking vendors to turn the January payment into a long-term loan, sources told Billboard.

In fact, the chain put out a press release on Jan. 30 saying it had received a conditional commitment from General Electric to provide it with $550 million in credit, if certain vendors agreed to provide the chain with $115 million in credit. But the Chapter 11 filing and the DIP financing make the vendor credit commitment a moot point on the old debt.

In its most recent financial results for the nine-month period ended Oct. 30, Borders reported a loss of $185.2 million, or $2.76 cents per share, on revenues of $1.52 billion -- that compared with a loss of $169.3 million, or $2.82 per share, on revenues of $1.8 billion for the corresponding period in the prior fiscal year.

At that point, the company listed $896 million in inventory and $445 million in accounts payable on its balance sheet; while long-term debt, not including store leases, stood at $55 million and borrowing from its revolving lending facility supplied by Bank of America stood at $298 million.

Its unclear where the revolver stood when Borders filed, but the DIP financing will be used to pay off Bank of America, according to a Borders spokesperson, which means whatever is left would be the DIP financing available for inventory purchases and operations.

Should the Chapter 11 restructuring turn into a liquidation, that means music suppliers and other unsecured vendors will stand behind GE, the DIP lender, when recovery payments are made at the end of the Chapter 11 process. At press time, it was unclear if the major music suppliers will provide credit to Borders while the company is operating under Chapter 11 protection.

But Border management clearly is sending the message that they want to restructure the company, and expect vendor support.

"This [DIP] financing should enable Borders to meet its obligations going forward so that our stores continue to be competitive for customers in terms of goods, services and the shopping experience," Borders President Mike Edwards said in a statement. "It also affords Borders the opportunity to move forward in implementing the appropriate business strategy designed to reposition Borders to be a potentially vibrant, national retailer of books and other products."

The company said it will close about 200 stores, approximately 30 percent of chain's network, over the next few weeks as part of its restructuring. The company has an estimated $2 billion in off-balance sheet, rent commitments on stores; the Chapter 11 filing will allow the chain to jettison part of that liability as it closes the 200 stores. The threat of future closures during the Chapter 11 process usually helps merchants secure better rental terms for stores it plans to keep open.

"We are confident that, with the protection afforded under Chapter 11 and with the support of employees, publishers, suppliers and creditors, and the reading public, a successful reorganization can be achieved enabling Borders to emerge from the process as a stronger and more vibrant book seller," Edwards said.

But not everyone is sure it will play out that way. "Bank of America is an asset-based lender and Borders lead bank," one retail financial executive told Billboard. "Asset-based lenders love getting all the fees that a Chapter 11 provides. If they are banging out, that should tell you something."

Music vendors say they are more concerned about what Borders' Chapter 11 filing and what its outcome will mean for Barnes & Noble. While the New York-based chain now has a much larger music selection thanks to Borders' continuing downsizing for the music category, label executive say they always felt the New York-based chain was in music because of Borders.

If Borders pulls out of music or the chain goes away, the question of whether Barnes & Noble will continue to stay in music looms large as a future worry, according to executives.